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Press release from Marketwire

Artek Announces 2011 Financial Results and Provides Operations Update

Wednesday, March 21, 2012

Artek Announces 2011 Financial Results and Provides Operations Update18:33 EDT Wednesday, March 21, 2012CALGARY, ALBERTA--(Marketwire - March 21, 2012) - Artek Exploration Ltd. ("Artek" or the "Company") (TSX:RTK) is pleased to provide this summary of its financial and operating results for the three months and year ended December 31, 2011. A complete copy of the Company's comparative financial statements for the year ended December 31, 2011, along with management's discussion and analysis in respect thereof will be filed on SEDAR and on the Company's website at www.artekexploration.com.Three Months Ended December 31,Years Ended December 31,2011201020112010(000s, except per share amounts)($)($)($)($)FinancialOil and gas revenues11,6536,76744,27927,942Funds flow from operations (1)5,7822,52420,4639,484Per share - basic0.140.080.530.33- diluted0.140.080.530.33Net loss(16,168)(1,295)(16,915)(4,594)Per share - basic(0.40)(0.02)(0.44)(0.10)- diluted(0.40)(0.02)(0.44)(0.10)Capital expenditures13,6638,46043,83528,396Property dispositions---(897)Working capital deficiency(50,981)(50,606)(50,981)(50,606)Shareholders' equity93,85086,08393,85086,083(000s)(#)(#)(#)(#)Share DataAt period-endBasic43,43333,08343,43333,083Options and warrants3,4809403,480940Weighted averageBasic40,88133,08338,57528,656Diluted41,23233,08338,93728,674OperatingProductionNatural gas (mcf/d)8,5717,0348,1957,342Crude oil (bbls/d)907573912531NGLs (bbls/d)118488553Total (boe/d)2,4541,7932,3631,808Average wellhead pricesNatural gas ($/mcf)(2)4.324.384.504.72Crude oil ($/bbl)92.8976.3388.0174.32NGLs ($/bbl)72.6362.0373.1562.09Total ($/boe)(3)53.5143.3852.6742.91Royalties ($/boe)(8.96)(7.87)(10.14)(7.02)Operating cost ($/boe)(12.42)(12.14)(11.61)(12.62)Transportation cost ($/boe)(1.89)(1.88)(1.79)(1.77)Operating netback ($/boe)(4)30.2421.5029.1421.50Wells drilled - gross (net)Development1 (0.6)2 (1.5)4 (2.1)5 (3.6)Exploration--2 (1.6)3 (2.6)Abandoned----Total1 (0.6)2 (1.5)6 (3.7)8 (6.2)Undeveloped landGross (acres)146,298100,507Net (acres)107,94071,620(1) Funds flow from operations is calculated using cash flow from operations as presented in the statement of cash flows before non-cash working capital and asset retirement expenditures. Funds flow from operations is used to analyze the Company's operating performance and does not have a standardized measure prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable with the calculations of similar measures for other companies.(2) Product prices include realized gains or losses from physical fixed price contracts.(3) Oil equivalent price includes minor sulphur sales revenue.(4) Operating netback equals oil and gas revenues including realized hedging gains and losses on commodity related contracts less royalties, operating costs and transportation costs calculated on a boe basis. Operating netback does not have a standardized measure prescribed by IFRS and therefore may not be comparable with the calculations of similar measures for other companies.2011 FINANCIAL AND OPERATING HIGHLIGHTSIncreased average production to 2,363 boe/d (42% crude oil and NGLs), an increase of 31% over 2010, while exiting the year at over 3,000 boe/d. Improved oil and gas revenues by 64% to $44.3 million. Recorded a 116% improvement in cash flow to $20.5 million or a 61% increase on a per share basis. Increased crude oil and liquids volumes to 42% of total production from 32% a year ago. Reduced 2011 operating costs 8% to $11.61/boe from $12.62/boe in 2010. Improved operating netbacks 36% to $29.14/boe ($30.24/boe for fourth quarter of 2011) as a result of increased crude oil and liquids production. Invested $43.8 million in capital expenditures, including $3.6 million on undeveloped land acquisitions, $1.9 million on seismic for new exploration plays in the Inga area of northeastern British Columbia and the Peace River Arch ("PRA") region of northwestern Alberta, and $4.7 million on facility and sales capacity expansion in the Inga and Dunvegan, Alberta areas. Drilled 6 gross (3.7 net) wells (100% success rate), including 4 gross (2.4 net) Doig wells at Inga that tested at an overall average restricted rate of 2,350 boe/d with approximately 1,300 bbls/d of condensate. Increased proved reserves 37% to 12.9 mmboe and proved plus probable reserves 23% to 22.9 mmboe, highlighted by a 47% increase in proved plus probable crude oil and liquids reserves to 5.0 mmbbls. Replaced 2011 production of 862.5 mboe by 4.1 times and 4.9 times with proved and proved plus probable reserves additions, respectively. Achieved all-in F&D costs, including future development costs ("FDC"), of $16.83/boe on proved plus probable reserves and $18.14/boe on proved reserves. F&D costs excluding negative revisions related primarily to reduced forward pricing for natural gas were $13.41/boe on a proved plus probable basis including FDC. Our three-year average F&D costs were $15.71/boe on proved plus probable reserves and $21.34/boe on proved reserves, including FDC. Achieved a recycle ratio of 1.8 based on proved plus probable F&D costs of $16.83/boe and Artek's fourth quarter 2011 operating netback of $30.24/boe or a 2.3 recycle ratio using F&D costs after price related negative revisions. F&D costs on proved plus probable reserves, excluding negative revisions that were based primarily on reduced forward pricing for natural gas, were $13.41/boe, including FDC. The recycle ratio on a proved plus probable basis net of these negative revisions would be 2.3. Increased proved plus probable reserves value 21% to $219.8 million (10% discount), despite a 19% decrease in the independent engineers' forecast gas pricing in the near three-year period (*). During 2011, Artek was able to offset the effect of lower natural gas prices by significantly increasing its liquids-rich natural gas reserves at its Inga Doig resource play. Increased undeveloped land acreage 51% to 107,940 net acres. Estimated net asset value of $4.40 per diluted share on a proved plus probable basis, details of which calculation were set out in the Company's March 6, 2012 press release, and $2.76 per diluted share on a proved basis. Exited the year in excess of $150.0 million of income tax pools. Increased operating bank line to $60.0 million and added a $10.0 million acquisition/development line of credit. On January 4, 2012, the Company divested a portion (one-third) of its non-operated oil and gas assets in the Leduc Woodbend area in Central Alberta for approximately $19.5 million to reduce debt. Pro-forma FD&A costs on proved plus probable reserves, after giving effect to the January 4, 2012 partial sale of 691 mboe at the Company's Leduc Woodbend property, were $14.95/boe, including FDC, and resulted in a pro-forma recycle ratio of 2.0. * More detailed information in respect of the results of Artek's independent reserves evaluation for the year ended December 31, 2011 (the "Sproule Report") as evaluated by Sproule Associates Limited ("Sproule") and related information was contained in Artek's press release dated March 6, 2012 and will be contained in Artek's Annual Information Form to be filed on or before March 30, 2012. It should not be assumed that the discounted future net revenues estimated by Sproule represent the fair market value of the reserves.2011 FOURTH QUARTER FINANCIAL SUMMARYArtek's fourth quarter cash flow increased 130% to $5.8 million or up 75% on a per share basis to $0.14 from 2010. The Company's operating netback rose 41% to $30.24 per boe primarily as a result of Artek increasing crude oil and liquids volumes to 42% of total production versus 35% a year ago. Average production for the three month period was 2,454 boe/d, up 37% from 2010 but down slightly from 2011 third quarter production of 2,498 boe/d due somewhat to downtime associated with upgrading the Company's Inga facility but primarily as a result of delayed production volumes from pad drilling of two horizontal wells at Inga. These wells tested at a combined rate of approximately 4,600 boe/d (2,760 boe/d net), but because one of the wells required refracturing, their volumes did not come on-stream until late December. The refrac operation resulted in an approximately three week delay that impacted the quarter by approximately 200 boe/d and approximately $1.4 million of additional capital costs. Exit volumes for 2011 were in excess of 3,000 boe/d of which approximately 42% were liquids.The Company's fourth quarter loss of $16.2 million was the result of a $21.3 million ($16.0 million net of deferred income tax reduction) impairment of its natural gas producing properties in the Deep Basin and Peace River Arch areas due to significant declines in the price forecasts for natural gas. The impairments were required under new International Financial Reporting Standards ("IFRS") even though on a total Company basis, Artek had a significant ceiling test cushion of approximately $65 million when its properties at Inga and Leduc Woodbend, which have significant liquids, were included. The fourth quarter loss also included $2.2 million ($1.6 million net of deferred income tax reduction) for an unrealized loss on hedging. As detailed below the net asset value at December 31, 2011 was $4.40 per share based on estimated future net revenues associated with proved plus probable reserves ($2.76 per share on total proved reserves) before income tax and discounted at 10% as reflected in the Sproule Report. Excluding the Company's natural gas properties and including only the oil and significant liquids producing properties of Inga, Fireweed, Leduc Woodbend and Beaton the Company estimates its net asset value to be $3.00 per share on a proved and probable reserves basis. NET ASSET VALUEThe following table provides management's calculation of Artek's estimated net asset value at December 31, 2011 based on the estimated future net revenues associated with Artek's proved plus probable reserves before income tax and discounted at 10% as presented in the Sproule Report and an independent third party evaluation of Artek's undeveloped land. ($ thousands)Proved plus probable reserves - discounted at 10% (notes 3 and 4)219,826Undeveloped Land (note 1)31,529Estimated working capital deficiency as at December 31, 2011 (note 2)(50,981)Proceeds from dilutive stock options6,089Net asset value206,463Diluted Common shares outstanding (thousands)46,913Net asset value per share4.40Notes:(1) Based on an independent land evaluation. (2) Working capital deficiency includes an estimate of the Company's accounts receivable less accounts payable and accrued liabilities and bank debt and derivative instruments as at December 31, 2011. (3) Includes net present value discounted at 10% before income taxes of $18.9 million for proved plus probable reserves attributed to the Leduc Woodbend partial interest which was disposed of by Artek in January 2012 for $19.5 million. (4) Artek has also calculated its estimated net asset value at December 31, 2011 attributed solely to its Inga, Fireweed, Leduc Woodbend and Beaton properties. Based upon proved plus probable reserves discounted at 10% before income taxes of approximately $154.2 million, as reflected in the Sproule Report, the estimated net asset value would be $3.00 per share. OPERATIONS UPDATE AND 2012 OUTLOOKIn light of decreasing natural gas prices that continued into the first quarter of 2012, the Company has prudently shut in approximately 2.4 mmcf/d of dry natural gas production which will impact production volumes for the first half of the year by approximately 250 to 300 boe/d. If natural gas prices remain below $1.75/GJ for a sustained period, the Company will consider shutting in an additional 1.0 to 1.5 mmcf/d or approximately 160 to 250 boe/d. Artek previously announced a 2012 capital expenditure budget of $45 million to $49 million however due principally to the current outlook for natural gas, the Company has decided to invest a more conservative $44 million to $46 million which contemplates the drilling of up to 14 gross (8.6 net) wells. The program consists of up to 7 gross (4.0 net) horizontal wells at Inga/Fireweed, targeting Doig condensate and gas (where Artek's first five horizontal wells tested at an average rate of over 2,000 boe/d with approximately 60% condensate), 3 gross (3.0 net) horizontal wells targeting Triassic oil in the Peace River Arch ("PRA") area and 4 gross (1.6 net) vertical wells targeting Glauconite oil at Leduc Woodbend. The capital program will remain weighted 100% towards projects targeting oil and condensate, with associated natural gas. Artek did not commence its 2012 drilling program until late February due in part to a delay in rig scheduling and partly to accommodate pad drilling logistics at Inga in order to avoid weather related cost inflation during spring break-up. Artek believes that natural gas prices will improve towards year-end and drilling and completion costs will also improve in the second half of the year. Consistent with this, the Company feels it is prudent to shut-in some dry natural gas volumes and have its 2012 capital program biased towards the second half of the year. These factors support the delaying of one Inga horizontal and one PRA horizontal well until after break-up. Consequently, the Company will invest approximately $20 million to $21 million of capital during the first half of the year in drilling two horizontal wells and a recompletion of an existing horizontal well at Inga as well as two PRA horizontal wells. The first Inga well is currently near total depth and is expected to be completed in early April and on-stream in mid-April, while the second Inga horizontal should finish drilling in late April and completed in early May. The first PRA horizontal well has been drilled and multi-staged fraced, and after a 111 hour test period, the well was flowing at approximately 149 boe/d (54% light sweet crude oil) and about 858 bbls of water per day. The second horizontal well has reached total depth and is currently being completed. Water from the wells will be disposed of at the Company's 100% owned and operated facility in the Dunvegan area. While Artek is still optimizing drilling and completion methods for this play, the test rates are on track with management expectations. In the second half of 2012 the Company anticipates spending approximately $24 million to $25 million. Beginning in June, the Company plans to drill and complete five Inga horizontal wells sequentially (approximately one each month) with all wells anticipated to be on production by year-end. Also planned for the second half of the year is a 4 gross (1.6 net) well development oil program at Leduc Woodbend that will commence in July and is anticipated to be completed in September as well as a PRA horizontal oil well planned for late summer.The combination of shut-in natural gas volumes, capital expenditure bias towards the second half of the year and a slight reduction in capital expenditures has resulted in slightly lower estimates for 2012. Average production levels are now expected to be in the 3,200 to 3,300 boe/d range versus prior guidance of 3,400 to 3,500 boe/d, although the 2012 exit rate is still forecast to exceed 4,000 boe/d (approximately 40% liquids). These targets represent year-over-year growth of approximately 40% on average annual production and approximately 25% to 30% on exit production. The Company estimates that first half production volumes for 2012 will average approximately 2,600 to 2,800 boe/d, and approximately 3,600 to 3,800 boe/d for the second half of the year with exit production greater than 4,000 boe/d. The revised program uses pricing assumptions of $100/bbl US WTI for oil and $2.00/GJ for natural gas which should result in forecasted 2012 cash flow of approximately $25 million to $26 million with an exit forward cash flow estimate of approximately $38 million and an estimated exit debt to forward cash flow ratio of 1.2 to 1.4 times. An increase in $1.00/GJ results in an annual cash flow increase of approximately $3.8 million. The pace of investment will continue to be reviewed on a quarter by quarter basis relative to commodity prices.Given the depth of Artek's oil and liquids project inventory, the Company has the flexibility to modify its program due to the poor outlook for natural gas prices while still achieving solid growth targets. Artek will continue to investigate ways to realize greater value for its shareholders on its dry natural gas inventory of reserves and prospects while we await the return of more reasonable prices. In the meantime, the Company maintains financial flexibility and a strong balance sheet with a $60.0 million operating line of credit plus a $10.0 million development line with approximately 50% of the operating line and none of the development line currently drawn. ADVISORIESForward Looking Statements: This document contains forward-looking statements. Management's assessment of future plans and operations, future results from operations, production estimates including forecast 2012 average and exit rates, commodity mix, initial production rates, drilling plans, the volumes and estimated value of reserves, timing of drilling and tie-in of wells, productive capacity of new wells, estimates of shut-in production and the timing thereof, future oil and natural gas prices, capital expenditures and the nature and timing of these expenditures, cash flow estimates and financial capacity to carry out its planned 2012 capital program may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, the inability to fully realize the benefits of the acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, the Company's actual results may differ materially from those expressed in, or implied by, the forward looking statements. Forward looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although Artek believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward looking statements because the Company can give no assurance that such expectations will prove to be correct. The recovery and reserve estimates of Artek's reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. In addition to other factors and assumptions which may be identified in this document and other documents filed by the Company, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which Artek operates; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; Artek's ability to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development or exploration; the timing and costs of pipeline, storage and facility construction and expansion; the ability of the Company to secure adequate product transportation; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Company operates; and Artek's ability to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the Company's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Company's website (www.artekexploration.com). Furthermore, the forward looking statements contained in this document are made as at the date of this document and the Company does not undertake any obligation to update publicly or to revise any of the included forward looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.BOE Conversions: Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel. This conversion ratio of six thousand cubic feet of natural gas to one barrel is based on an energy equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion ratio on a 6:1 basis may be misleading as an indication of value.Test results and initial production rates: the pressure transient analysis or well test interpretation has not been carried out and thus certain of the test results provided herein should be considered to be preliminary until such analysis or interpretation has been completed. Test results and initial production rates disclosed herein may not necessarily be indicative of long-term performance or of ultimate recovery.Net asset value calculations: in relation to the disclosure of net asset value ("NAV"), the NAV table shows what is normally referred to as a "produce out" NAV calculation under which the current value of the Company's reserves would be produced at forecast future prices and costs and do not necessarily represent a "going concern" value of the Company. The value is a snapshot in time and is based on various assumptions including commodity price forecasts and foreign exchange rates that vary over time. It should not be assumed that the future net revenues estimated by Sproule represent the fair market value of the reserves, nor should it be assumed that Artek's estimated value for its undeveloped land holdings represent the current fair market value of the lands.Artek is a crude oil and natural gas exploration, development and production company headquartered in Calgary, Alberta, Canada. Artek's shares trade on the TSX under the symbol "RTK".FOR FURTHER INFORMATION PLEASE CONTACT: Darryl MetcalfeArtek Exploration Ltd.President and Chief Executive Officer(403) 296-4799ORDarcy AndersonArtek Exploration Ltd.Vice President Finance and Chief Financial Officer(403) 296-4775